CONTRACTS II OUTLINE

PROFESSOR SCOTT SPRING 1999

I. PAROL EVIDENCE RULE
A. UNDER RESTATEMENT
(1) Like SOF, Parol Evidence is a rule of exclusion (2) Evidence of prior or contemporaneous agreements that contradict, modify, or add supplemental contractual terms is inadmissible if the written K is intended as a complete and final expression of the parties (writing is fully integrated) (R2d '213). (a) A partially integrated writing may be supplemented by consistent terms, but not contradictions (3) A written K that appears complete and specific is assumed to be integrated unless other evidence shows that it was not a final expression (R2d '209). To be integrated, the K merely needs to be complete, not comprehensive (4) Exceptions to Parol Evidence Rule (R2d '214). Evidence is admissible to establish: (a) whether the writing is an integrated agreement ('214(a)) (b) whether the integration is complete or partial ('214(b)) (c) the meaning of ambiguous terms (or trade usage applied to otherwise clear terms) in the K ('214(c)) 1. Some cts have stretched the doctrine to allow evidence to show that the plain words of the K are ambiguous. If they find ambiguity, they will then apply the same evidence to interpret the ambiguity 2. However, other cts have held that if the terms are unambiguous, then evidence cannot be admitted (Hershon) (d) illegality, incapacity, fraud, duress, mistake, or other invalidating cause ('214(d)) - for defenses, usually only applies to substantive uncon and sometimes mistake (e) ground for granting or denying rescission, reformation, specific performance, or other remedy ('214(e)) - usually used to show that term was excluded because of clerical error - need clear and convincing evidence that term was meant to be included by both parties (f) the existence of collateral agreements - an agreement is not fully integrated if the parties have made a consistent additional agreement which is either agreed to for separate consideration or is ³such a term as in the circumstances might naturally be omitted from the writings´ (R2d '216(2)) (g) subsequent modifications to the K (see modification section) (5) A small number of cases, for the purpose of a promissory estoppel claim, have allowed evidence to show that the P detrimentally relied on promises not contained in an integrated written K

B. UNDER UCC '2-202
(1) Written terms may not be contradicted, but may be supplemented or explained with extrinsic evidence such as (a) trade usage or course of performance ('2-202(a)) (defined in UCC '1-205) 1. Parties can be bound by a usage common to the place they are in business, even if it is not the usage of their particular vocation or trade (Nanakuli Paving) 2. Persons who should be aware of the trade usage include those who regularly deal with members of the relevant trade (Nanakuli Paving) (b) consistent or additional terms (for partially integrated agreements) - if the term would have certainly been included in the K if agreed to, it should be kept out ('2-202(b))

II. IMPLIED TERMS
A. IMPLIED TERMS GENERALLY
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and Buyer¶s right of inspection '2-513 (2) Implied by law .the person making the real illusory promise is bargaining for the chance to prove that their performance is attractive B. The seller has superior knowledge..R2d '205 & UCC '1-203 (3) Policy Reasons for good faith requirement: (a) reduces transaction costs finding out the truth of the statement (b) polices opportunistic behavior . Implied terms help decrease the transaction costs in bargaining and some also help to prevent unconscionable K¶s (good faith requirements) (5) Even though Cardozo did not find so in Lady Duff Gordon. The event itself is notice when it occurs (e.A term implied by law (e. or sample 1.(1) Implied in fact . it is a common practice and not done in bad faith (UCC '2-208 & Eastern Airlines) (7) Best Efforts . declining sales for 2 yrs) (comment 10) C. course of performance. death of franchisee. description of goods. 2. Bad faith would be taking advantage of other party¶s poor position and buying or not buying purely on price variances (6) If course of performance indicates that it was allowed in the past. WARRANTIES (1) Warranties are essentially risk shifting instruments that function as insurance to reduce the risk to the buyer.g. IMPLIED OBLIGATION OF GOOD FAITH (1) Good faith: UCC '2-103 .. Formal words such as ³guarantee´ do not have to be used.default rules include: Place of delivery '2-308. or sample or model that is made part of the basis of the bargain creates a warrantee that the goods will conform. However.commercial standards include trade usage. . They substitute for the lack of expertise and impossibility of inspection faced by the buyer. Any affirmation of fact or promise.guarantees that title is good and unencumbered (b) '2-313 .g.implied warranty of title . description. an affirmation of the value of goods or statement of seller¶s opinion does not create an express warranty Page 2 .A term implied by fact is what the parties would have agreed to or did agree to.express warranty by affirmation. Time of payment '2-310. good faith) (a) cannot be overcome by express terms and (b) exists regardless of the parties¶ intent (4) Default rules should reflect the agreement that the parties probably would have made if they had bargained over the issue.Good faith is honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade .Exclusive dealing K¶s imply an obligation on the seller to make his best efforts to supply the goods and on the buyer to make his best efforts to promote and sell the goods ('2-306(2) & Lady Duff Gordon) (8) Reasonable notice before termination '2-309(3) of K¶s that are terminable at will (a) Reasonable notice is a default rule . Risk of Loss '2-509. (2) Warranties in UCC (a) '2-312 . variations in buying are allowed if done in good faith.moral and ethical reasons (c) protects the reasonable expectation of the contracting parties (4) Good faith framework: (a) What is the purpose behind this K? (b) Does the conduct in question frustrate this purpose? (5) In a requirements K (UCC '2-306). and often is in a better bargaining position. greater control of the risks. ³Illusory´ promises may reflect a rational bargain .can K out right to terminate at will as long as acting on that clause would not be unconscionable (comment 8) (b) Do not need to give notice if there is a material breach of K (comment 9) (c) Do not need to give notice if K states termination upon a particular event. and course of dealing in past K¶s (2) Duty of good faith and fair dealing extends to every K .Some terms implied in fact .

stronger case for residential property than commercial property (5) Warranties toward services (a) Normally warranties of quality are also implied for commercial service providers (e. accountant) are normally only held to a negligence standard. goods are fit for ordinary purposes for which the goods are used. a state may have specific statutes that limit the application of warranties.g. and willful or negligent damage to article purchased while in his hands (b) If there has been any fraud or imposition on the part of the seller or if the K is unfair. then the rule does not apply .applies to merchants 1. AVOIDING ENFORCEMENT A. the buyer relies on the seller. (b) Professional services (e.warranty of habitability (McDonald v Mianecki) . the buyer must be offered an opportunity to reasonably examine the good. Their fiduciary responsibility serves as a surrogate for a warranty of quality of service. (f) remedies for breach of implied warranty can also be limited by the K (4) Warranties also apply to real property . or any unfair advantage has been taken of the minor inducing him to make the purchase. they may be held for breach of express warranties made III. and 3. they are of fair. However. lawyer.implied warranty of merchantability . (d) some courts also require a showing that it was part of a mutual agreement (d) the seller cannot generally disavow ³all warranties´. Schrader rule (a) Where the minor has not been overreached in any way and there has been no undue influence. the seller knows or has reason to know of the buyer¶s needs. the goods do not conform to that particular purpose (even if they conform to ordinary use there is still a breach) (3) The seller can disclaim implied warranties ('2-316) (a) but must be conspicuous. but must be specific (e) they can also be excluded or modified by trade usage or course of performance or dealing. without allowing the vendor of the goods reasonable compensation for the use of.. and 3. obvious. 2.(c) '2-314 . The court justified not extending a warranty since the hospital could not eliminate the risk of harm and because of the importance of the market for the product.. depreciation. However.g. and in writing (b) for warranty of merchantability. The K must be disaffirmed by the minor either before or in reasonable time after attaining majority or it is automatically affirmed (R2d '14) (2) Exception: the minor is liable for the reasonable value of necessaries (R2d '12) (3) Other rules practiced in a minority of states: (a) Benefit rule . doctor.implied warranty of fitness for a particular purpose 1. that he ought not to be permitted to recover the amount actually paid.upon recision. MINORITY (1) K¶s of infants are not void.In. if goods are fungible.This rule balances the interests of a good-faith vendor against the interest of the child Page 3 . recovery of the full purchase price is subject to a deduction for the minor¶s use of the merchandise (b) The minor is liable for depreciation of the product while in his possession (4) Dodson v. but voidable at the election of the minor. and taken and used the article purchased. conform to other promises made (d) '2-315 . Doe v Travenol Labs there was a statute limiting warranties to blood products. and 2. and the K is fair and reasonable. and even quality. . it must explicitly mention merchantability (c) for an ³as is´ clause to work. average. and the minor has actually paid money on the purchase price. hairdresser uses product that burns hair).

and the victim is left with no reasonable alternative. or c. threat of breach of good faith in K with victim . (c) the rule looks at understanding and the person¶s ability to conform his actions to reason (3) If the person has been declared legally incompetent and a guardian has been appointed to care for the incompetent person¶s person or property. b. force (c) based on involuntary nature of one¶s acts and the tainting of the bargaining process. the threat is otherwise a use of power for illegitimate ends (c) Absence of alternative . (2) Modern expansion of duress (including economic duress) (R2d '175) (a) If assent is induced 1. (cognitive test) or 2. Ct may grant relief as justice requires. bad faith threat of using civil process . the resulting exchange is not on fair terms and ('214(2)) a.B. the K is voidable (b) A threat is improper if ('176) 1. he is unable to act in a reasonable manner in relation to the transaction and the other party knows or has reason to know of his condition (volitional test) (b) Where the K is made on fair terms and the other party is without knowledge of the mental illness. the ct requires clear and convincing evidence of mental incapacity at the time of the signing in order to rescind. the effectiveness of the threat is significantly increased by prior unfair dealing with the party making the threat. he is unable to understand in a reasonable manner the nature and consequences of the transaction.assent is not given (b) limited to physical threats of 1. the act would harm the recipient and not benefit the party making the threat. DURESS (1) Common law duress (R2d '174) (a) automatically voids K . the power of avoidance terminates to the extent the K has been performed or the circumstances have so changed that avoidance would be unjust.Rule under restatement (R2d '15) (a) K is voidable by a party if by reason of mental illness or defect 1. Testimony of people who observed the signing outranks testimony from people who have observed him before or subsequent to the signing 2.hardship to be suffered by nonacceptance of proposed conditions 1.threat of improper breach ('176(1)(d)) 5. then the person does not have the capacity to enter into K¶s (R2d '13) C. irreparable injury . threat of criminal prosecution ('176(1)(b)) 3. A presumption of mental incapacity does not arise merely because of an unreasonable or unnatural disposition of property (b) This test looks at the person¶s understanding of the transaction at hand (2) Volitional test . or 2. threat of crime or tort ('176(1)(a)) 2. by improper threat by that other party 2. 1. false imprisonment 3. MENTAL INCAPACITY (1) Cognitive test (Estate of McGovern v State Employees¶ Retirement Board) (a) In the face of a signed document.threat of frivolous law suits ('176(1)(c)) 4. physical injury 2. inability to cover Page 4 .bankruptcy.

cost of business failure is extremely high (b) punishing wrongful acts by other parties .when is an omission an assertion? (R2d '161) . UNDUE INFLUENCE (1) Elements . in good faith and without reason to know of the duress. the K is voidable unless the other party. the K is voidable unless the other party. Unfair persuasion of a party who is under the domination of the person exercising the persuasion. and (b) excessive pressure is applied by the other party (2) Rule under Restatement .F(2) 2..which places the parties in status quo.(c) If threat is made by a third party.E(4) 3. the condition that they were in before they entered into the K. physical impairment. It has restitutionary aspects. in good faith and without reason to know of the duress. (4) Probative factors as to whether undue influence include (Odorizzi) (a) Discussion of the transaction at an unusual or inappropriate time (b) Consummation of the transaction in an unusual place (c) Insistent demand that the business be finished at once (d) Extreme emphasis on untoward consequences of delay (e) Use of multiple persuaders against a single party (f) Absence of third-party advisors to the servient party (g) Statements that there is no time to consult financial advisers or legal counsel E.E(3) 4. emotional. or 2.lack of alternatives means more egregious impropriety by party causing duress (5) Duress (as well as most of the other defenses) brings rescission .need to prove: (a) undue susceptibility to pressure on one party because of a mental.no claim if fact is true (c) that the recipient is justified in relying upon (2) Where the misrepresentation is made by a third party and the recipient is justified in relying upon it.when is an opinion a fact? (R2d '168 & '169) . and false . but it is not technically restitution (6) May Also have tort claim including punitive damages for duress D. gives value or relies materially on the transaction (3) Bad faith is not an issue in undue influence claims. an assertion . Do not need special relationship. MISREPRESENTATION (1) A K is voidable when (R2d '164(1)) (a) assent is induced (implies reliance) (b) by either a fraudulent or material misrepresentation 1. gives value or relies materially on the transaction (3) Duress is ground in notions of unjust enrichment and restitutionary principles (4) Policy reasons against economic duress: (a) parties must eat K losses caused by threats up to the point of insolvency . Unfair persuasion of a party who is justified in assuming based on a special relationship that persuader would not act in manner inconsistent with the victim¶s welfare (b) If undue influence the K is voidable by the victim (c) If undue influence is caused by a third party. or special relationship. the K is voidable unless the other party in good faith and without reason to know of the misrep gives value or relies materially on the transaction (R2d '164(2)) Page 5 .. of fact .R2d '177 (a) Undue influence is 1. that is either fraudulent or material (R2d '162) .

..(3) Fraudulent or material misrepresentation (R2d '162) (a) A misrep is fraudulent if (R2d '162(1)) 1. securities market. as to the existence of a fact.stated an opinion that he did not hold (c) The recipient can rely upon the opinion as an assertion only if the recipient (R2d '169) 1. the speaker knows enough facts to justify forming the opinion .g. is in a trust and confidence relationship (i. (R2d '169(b)) OR 3. and the non-disclosure would be bad faith (c) the speaker knows that the disclosure would correct a mistake of the recipient as to the contents or effect of a writing in whole or in part (d) there is a trust and confidence relationship between them (i. does not have the confidence that he states or implies about the truth of the assertion. the speaker does not know any facts that would make the opinion false. only the cost. without certainty.. (R2d '169(a)) 2. it may be impossible for you to check on the truth of the opinion for yourself) F. b.Policy reasons: even though it increases the costs of information and wastes efforts. knows that he does not have the basis that he states or implies for the assertion. the maker intends his assertion to induce assent and 2. or c. fiduciary) (3) Hill v Jones . you must disclose (Hill v Jones) (6) Factors to consider in determining necessity of disclosure under R2d '161(b) bad faith (Keeton): (a) difference in degree of intelligence of the parties (b) relationship between the parties Page 6 .a seller has a duty to disclose if he knows of facts which materially affect the value of the property not known or readily observable (through due diligence) by the buyer (4) Disclosure is also required in areas with structural weaknesses from non-disclosure (e. Typically opinions deal with matters such as quality or value of property (R2d '168(1)) (b) A statement of opinion is a misrepresentation of fact if the person giving the opinion misrepresented his state of mind (R2d '159) . the maker: a.g.g. (b) A misrep is material if (R2d '162(2)) 1. and 2. or 2. the maker knows that it would be likely to induce the specific recipient to assent (4) Opinions . (2) Non-disclosure is equivalent to an assertion that the fact does not exist only when (R2d '161) (a) the speaker knows that the disclosure is necessary to prevent a previous assertion from being a misrep (b) the speaker knows that the disclosure would correct a mistake of the recipient as to a basic assumption on which the party is making the K.e.. reasonably believes that the person is an expert (professional).must have justified reliance to be actionable (a) An opinion is the expression of a belief.if either is not true (misrep of actual opinion or not enough info to make opinion). it would likely induce a reasonable person to assent. forced disclosure creates incentive not to discover by either party since they do not receive the benefit from finding information. can possibly prevail on (R2d '168(2)): An opinion is an implied representation that 1. the opinion may be actionable if it is reasonable for the recipient to rely upon the opinion (e. age or mental incapacity) (R2d '169(c)) (d) If '169 fails. home mortgages) (5) Some states have rules on inquiry disclosure .if someone asks. We want people to invest in getting information to better utilize resources. NON-DISCLOSURE (1) There is no general duty for parties to disclose information. is for some other reason particularly susceptible to a misrep of the type involved (e.e.. . knows or believes that the assertion is not true. fiduciary or guardian).

a defect in the bargaining process 1. value received. advantaged party is an expert. how K is made . no bargaining power.active concealment of material fact G. sheer excessive price. and illiterate (b) substantive . the K may be unenforceable if (a) the requirement has a regulatory purpose (designed to protect the public).(c) the manner in which the info is acquired . or limit the application of the clause that would cause an uncon result (UCC '2-302 & R2d '208) (4) Most cts allow uncon only as a defense for rescission and not as a means of affirmative relief for damages or restitution (5) Uncon is not purely about disparity of bargaining power. but more about oppression and improper practices.K¶s in violation of purely revenue raising statutes are not void unless it expressly states so in the statute. bribes.releases and insurance K¶s usually require disclosure of all material facts (g) importance of the fact not disclosed (h) the conduct of the person not disclosing .cost/price disparity. no reasonable alternative. emergency) 3. unusual time.. However. the ct may refuse to enforce the K. place or circumstances (e. It is used as a ³catch all´/´safety net´ doctrine for where the K seems horribly unfair. but Restatement indicates that excessive price may be a basis of uncon (R2d '208) (8) Consumer protection legislation (a) It is often used to limit tactics by sellers to create K¶s and terms that would be uncon (b) Legislation has stronger impact than law of uncon. enforce the remainder of the K without the uncon term.no other sellers in the market. not disturb allocation of risks because of greater bargaining power (UCC '2-302). and it does not have as strong a deterrent on the seller.g. or similar agreement (R2d '181) . adhesion K¶s (take it or leave it deal). most people do not litigate.oppressive nature of terms in K . but it does not fit into other defenses such as duress..by chance.decided by judge (7) Price uncon.may need less of one kind if high degree of the other (a) procedural ..g. fine print.ethical quality (d) nature of the fact not disclosed .. assassinations) (3) Failure to comply with license. money paid vs. PUBLIC POLICY (1) Not based upon defects in the bargaining process.grossly excessive price alone can make agreement uncon (a) in general. incomprehensible language 2. forfeiture (3) If a ct finds that a K or term is uncon at the time it was made. registration. Sellers are more likely to need to disclose than the buyer (f) the nature of the K itself . excessive penalty charges. denial of basic rights and remedies.is defect obvious? . and (b) the interest in the enforcement of the promise is clearly outweighed by public policy Page 7 . but relates to public¶s interest in making the machinery of enforcement unavailable (2) K¶s with criminal subject matter are unenforceable (e. all sellers use the same clause. or illegal act . or fraud.high pressure sales tactics. (6) The court should try to prevent oppression and unfair surprise. imbalance of obligations. how term is included in K . effort. Uncon is a question of law.patent/latent (e) general class to which the person who is concealing the info belongs. H.boilerplate. uneducated. term is significant aberration from standard trade practices. exploitation of the underprivileged. (Ahern v Knecht) . the obviousness of the price mitigates against findings of uncon (b) UCC is unclear as to whether price uncon is valid action. misrepresentation. UNCONSCIONABILITY (³UNCON´) (1) Uncon includes both an absence of meaningful choice on the part of one party and K terms which are unreasonably favorable to the other party (Williams v Walker-Thomas) (2) Uncon requires both procedural and substantive uncon . uncon is highly uncertain in law.

However.g. However.. Courts prefer not to allow them unless they are reasonable restraints. weighing against enforcement (R2d '178(3)) (i) strength or importance of public policy (ii) likelihood that non-enforcement will further that policy (iii) presence of deliberate misconduct (iv) connection between misconduct and term of K (c) Void the K. and preserve business good will. promise by the seller of a business not to compete with the buyer 2.(4) Where the statute is regulatory. weighing in favor of enforcement (R2d '178(2)) (i) parties¶ justified expectations (ii) forfeiture that would result if enforcement were denied (iii) special public interest in enforcement b. geographic scope. the restraint is greater than is needed to protect the promisee¶s legitimate interest. the hardship to the promisor and . old customers cannot still reasonably get to promisor if they want to (b) Allowable ancillary restraints include (R2d '188(2)) 1. a ct can (a) Rescind the K 1. (a) Even if ancillary. (2) Most states do not have statutes prohibiting CNC¶s (CA has statute). protect relationships. bad faith triggering by promisee b. R2d '197 states that a party cannot use restitution if the K was unforeseeable because of public policy unless denial of restitution would cause disproportionate forfeiture. or scope and type of industry/competition 2. the promisee¶s need is outweighed by a.shortage of supply. Other penalties in the statute fully punish the party in violation .excessive time. A K in violation of public policy is unenforceable if either legislature provided for it OR the interest in enforcement is clearly outweighed by public policy against enforcement (R2d '178(1)) a. or .However. (3) R2d '187 allows CNC¶s only where the restraint is ancillary to an otherwise valid transaction. Whether forfeiture is disproportionate depends on a balancing test of the forfeiture and the gravity of public interest involved (d) Only rescind the K if the statute explicitly calls for it 1. they protect trade secrets. However. the likely interest to the public . and most courts have not found them unenforceable per se. It furthers public policy embodies in the statute and is easy to administer 2. but bribe was used to get K) I. but use restitution to compensate for unjust enrichment . K does not violate. may cause windfall at one party¶s expense without their fault (b) Use the balancing test under R2d '178 1. it could have expressly done so in the statute 2.voiding the K would be excessive punishment (5) Even if the K does not violate a statute.likelihood of finding work elsewhere. promise by an employee/agent not to compete with the employer/principal 3. promise by a partner not to compete with the partnership Page 8 . COVENANTS NOT TO COMPETE (³CNC´) (1) There is an implicit underlying assumption that there is a general public policy against CNC¶s since they restrain economic competition and free trade. If the legislature wanted a prohibition. a ct may refuse to enforce it if it is directly related to some serious illegal activity (e. CNC is not allowed if (R2d '188(1)) 1.

the mistake is a basic assumption on which the K was made.If a ct finds a CNC that is unreasonable. buyer was aware of clause.if fact comes into existence after K is formed.otherwise it could be misrep (5) Unilateral mistake (a) Under the restatement. effectively statute IV. impracticability.changed circumstances .. and 2.(4) ³Blue pencil´ theory . AND EITHER a. a K is voidable by the party making the mistake if (R2d '153) 1.the ct will usually allocate the risk to the person best able to bear it if neither party is at fault (R2d '154(c)) (c) ³As is´ clauses as risk allocations 1. the mistake should be within the realm of ³present condition´ envisioned by the clause 3. the effect of the mistake is such that enforcement would be unconscionable. JUSTIFICATION FOR NONPERFORMANCE A. conditional K¶s .your thoughts are linked with company resources (6) CNC for lawyers are unenforceable per se because of rules of conduct. or b.³condition subsequent conditions (known as an ³out´) e. buying an option K d. (R2d '154(b)) OR 3. and frustration of purpose (2) A ct will intervene when the mistake is outside the range of risk allocation (foreseeable outcomes) (3) Normal remedy is rescission along with restitution of any benefits conferred. go to section (B) . can deal with the risk-loss provisions in the K by a.some cts hold that boilerplate is not enough to enforce an ³as is´ clause (Shore Builders) 2. includes inventions created on free time and sometimes unrelated to company¶s business.not boilerplate. instead of striking the entire CNC. getting a warranty (d) A ct does not look at fault or knowledge for mutual mistake . should be truly bargained for .. UNLESS he bears the risk of mistake (b) A party bears the risk of mistake when (R2d '154) 1. MISTAKE (1) A mistake relates to a mistake of a fact in existence at the time the K is formed . it has a material effect on the agreed exchange of performances that is adverse to him. and it was explicitly negotiated for . However. It is a per se rule .impossibility. the other party had reason to know or caused the mistake (R2d '153(b)) Page 9 . it has a material effect on the agreed exchange of performances 3..any inventions you have while in the employ of the company belong to the company. cts can award reformation of the K or pure restitution. 2. he does not bear the risk of mistake (explained under R2d '154). (4) Mutual mistake (a) A K is voidable by the adversely affected party if (R2d '152) 1. the risk is allocated to him by the agreement (R2d '154(a)) 2. insuring against the risk b. the ct finds it is reasonable to allocate the risk to him under the circumstances . and 3. the ct can sever it and enforce it only to the degree it finds reasonable (5) Inventions agreement . he is aware that he has limited knowledge with respect to the facts but treats his limited knowledge as sufficient. have experts inspect and look into permit requirements c.. the mistake is a basic assumption on which he made the K.

unless the language of the K or circumstances indicate the contrary 2. when his performance is made impracticable b. without his fault c. but most cts have been willing to grant relief to buyers as well (IMC v Llano) Page 10 . the other party can be placed in status quo and returned to their original position . or (ii) by compliance in good faith with gov¶t regulation or order. IMPRACTICABILITY. the seller must provide reasonable notice to the buyer about non-performance c.. the non-occurrence of which was a basic assumption on which the K was made. by the occurrence of an event d. The seller must make all reasonable efforts to assure that his source will not fail (cmt 5) 3.no significant detrimental reliance on the promise and damages to the other party by not enforcing K. or failure to come into existence of the thing necessary for performance (R2d '263 & UCC '2-613) (c) Impracticability under Restatement (R2d '261) 1. cts want to encourage public policy of companies working with gov¶t regulation. only the good faith of the seller in following the regulations matter (cmt 10) . deterioration. and . mainly windfall by enforcing it B. the non-occurrence of which was a basic assumption on which the K was made. Includes prevention of performance by government regulation or order ('264) (d) Impracticability under UCC '2-615 1. the consequences from enforcing the K would be uncon 4. CHANGED CIRCUMSTANCES .(b) Wil-Fred¶s test 1.however.even if regulation is later found illegal. Unless the seller assumed a greater obligation. destruction. the mistake relates to a material feature of the K 2. late or non-delivery is not a breach a.cts will often look at who had the better opportunity to minimize the chance of the risk or the damage caused by the risk (3) Most cts grant rescission as the sole remedy (4) Impossibility and Impracticability (a) cannot reasonably provide specific performance and money will not cure the problem (b) Impossibility: death or incapacity of person necessary for performance (R2d '262).IMPOSSIBILITY. so they may discharge the obligation anyway (IMC v Llano) b. The UCC does not discuss buyers. if performance has been made impracticable ('2-615(a)) (i) by the occurrence of an event. e. the seller may allocate production and deliveries between buyer and regular customers in any manner fair and reasonable ('2-615(c)) 2. it occurred despite due care by the person making the mistake 3. A party¶s duty to perform is discharged by supervening impracticability: a. AND FRUSTRATION OF PURPOSE (1) Changed circumstances relates to a mistake of a fact not in existence at the time the K is formed (2) These are equitable doctrines which are meant to fairly apportion risks between parties in light of unforeseen or unbargained for circumstances ..the gov¶t regulation must truly ³supervene´ in that it is beyond the seller¶s assumption of risk (cmt 10) .

questionable rule Page 11 .³acts of god´. A change in the old consideration (e. MODIFICATION (1) Generally. To the extent justice requires enforcement in view of a material change of position in reliance on the promise of the modification ('89(c)) .the party will not be released unless bankruptcy occurs . without his fault 3. The UCC views ³one-sided´ modifications as commonplace.profitability is easily manipulated by skilled accountants (International Harvester) (f) Market shifts 1. However. unless the language of the K or circumstances indicate the contrary (b) frustration must be substantial . The market shift must be due to unforeseeable event.(e) Performance is not excused simply because a K is no longer profitable .the object must be so completely the basis of the transaction that. embargo. cmt 4) . local crop failure. later service) can satisfy the new consideration requirement (b) Exceptions to pre-existing duty rule ('89) . then an agreement to modify the K is invalid without additional consideration 3.modifications are binding 1. 5. If modification is fair and equitable in view of unanticipated circumstances ('89(a)) .only usually provides reliance damages (c) If both parties agree to rescind the old K and then execute a new one with the modifications. To the extent required by statute ('89(b)) 3. natural disaster. (UCC '2-615. They also disfavor clauses included in boilerplate.. (2) Under Restatement (a) Pre-existing duty ('73) 1. since the pre-existing duty was eliminated (Schwartzreich) . by the occurrence of an event 4.A party¶s duty to perform is discharged: 1. to go unenforced only in the presence of special circumstances. Performance of a pre-existing duty cannot constitute consideration for K modification 2. The clauses should address the specific risks which the parties bargained for to be valid risk-allocation agreements (5) Frustration of purpose (a) R2d '265 . reduced time schedule. this is allowable. the restatement views ³one-sided´ modifications as presumptively improper and only enforceable in exceptional cases. ³Two-sided´ modifications mean that consideration has been given by both parties. or unforeseen shutdown of major sources of supply. Force majeure clauses are allocations of risk devises that cover areas that the impracticability doctrine may not cover 2. the non-occurrence of which was a basic assumption on which the K was made.g. A market shift caused by ordinary business activities and cycles that increases costs does not justify non-performance.not enough that the K may no longer be profitable (cmt a) (c) primary purpose . cts have been more willing to grant relief for gov¶t action than for act of war. The risk of market changes are inherent in long-term K¶s 2. If a party is already obliged to perform. as both parties understand. Cts disfavor broad force majeure clauses as methods of risk allocation. or market change (g) Mere foreseeability does not eliminate the defense of impracticability.harder burden than UCC good faith requirement 2. such as war. It still does not prove the allocation of the risk (R2d '261. cmt c) (h) Force majeure clauses 1. when a party¶s primary purpose is substantially frustrated 2. without it the transaction would not make sense (cmt a) C.

It is not a condition subsequent unless the party charged with its fulfillment can be said to have assumed the risk of forfeiture (Jones Assoc v Eastside Properties) (2) Under traditional common law... the restatement has allowed more liberal grounds for getting out of the K (a) Effect of a non-occurrence of a condition (R2d '225) 1. as long as (a) the event is not within the his control.even if a condition is excused. Wrongful threat of breach is bad faith . but only if the condition waived was not a material part of the performance or a material part of the risk assumed (R2d '84) (5) If the party waived the right to wait for fulfillment of the condition. and (b) the circumstances do not indicate that he has assumed the risk 2. there is no obligation and therefore no breach (b) A promise creates obligations on both parties and they are subject to liability for non-performance (c) Where it is doubtful whether words create or promise or condition. EXPRESS CONDITIONS (1) Express Conditions vs. A ct may excuse the non-occurrence of the event if it would cause disproportionate forfeiture.equity doctrine 1.was time important in the past. he may still be under a duty to perform despite the non-occurrence of that t condition (R2d '84) Page 12 . Unless it is excused. the non-occurrence of a condition discharges the duty when the condition can no longer occur 3. If the condition does not occur. Promises . they are interpreted as creating a promise. The performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused 2. A waiver is effective without consideration or reliance. Non-occurrence is not a breach unless a party is under a duty that the condition occur (b) Standards of preference with regard to conditions (R2d '227) . then party threatening breach must prove that it is not wrongful (c) Modification cannot be obtained by taking advantage of economic duress D. is it arbitrary now? .party receiving benefit can always try to argue portfolio theory. subject to liab for breach (a) A condition precedent is a prerequisite to performance.(3) Under UCC '2-209 (a) Modification does not need additional consideration to be binding (b) Good faith required (Roth v Sharon Steel test) 1.courts want certainty of commercial dealings and predictability. UNLESS its occurrence was a material part of the agreed exchange .if it is not a condition. but it must have some doubt on whether the condition was what they intended 1. Courts prefer to impose the duty on the party that the event occur if the event is within the party¶s control (c) Excuse of a Condition to Avoid Forfeiture (R2d '229) . . An interpretation is preferred that will reduce the party¶s risk of forfeiture. Existence of unforeseen changes which would prompt an ordinary merchant to seek a modification in order to avoid a loss 2. while generally following this rule. with duties on both parties. a ct may still impose restitutionary damages (4) Conditions can be waived by the party benefited by the condition. but probably will not work 2. and the written words of a K normally take priority (3) However.windfall by one party at the expense of the other .party having modification forced upon them must prove threat of breach. it is a promise. express conditions were strictly enforced (Inman) .allows cts to review express conditional terms of K.if event involves timing .

a. However. If a ct does not find a material breach on the other party¶s end. courts look at ('242) (a) the materiality of the breach (explained in '241) (b) how delay will affect the injured party¶s ability to find reasonable substitute arrangements (c) importance of time to K 1. Obligations are not permanently suspended until the breach becomes a total breach (see part E(4)). (b) A total breach by one party eliminates the other party¶s obligation to perform (c) Upon total breach. eliminating the obligations of the parties. 2. SUBSTANTIAL PERFORMANCE (³SP´) (1) SP is an equitable doctrine .specific grace period (d) the reasonableness of the injured party¶s conduct in communicating his grievances and in seeking satisfaction (comment b) (5) A party who thinks a material breach has occurred takes a risk when he stops performance.innocent mistake or minor carelessness.do not have to follow express conditions of K if equitable . If the nature of the K makes time essential or the K expressly states a drop dead date and acts accordingly. If not material. it is just one factor in '241 to consider (5) If SP. Kent) (6) Policy Issues in SP Page 13 .E. A good K should normally put limits on time leeway . it is SP (4) Act normally must be in good faith . damage for breach can be the difference in the FMV received rather than the replacement cost if the replacement cost is grossly out of proportion with the benefit received (Jacob & Youngs v. he will have committed a material breach F. MATERIAL BREACH (1) Generally (a) A breach is a total breach if the breach is material and the breaching party either cannot correct or fails to correct the breach within a reasonable period of time. not fraudulent or intentional error or reckless behavior. Stock phrases such as ³time is of the essence´ in the K will not mean that a delay is material if the other circumstances do not indicate that it is. but can still bring damages for harm incurred to date (2) An uncured material breach by one party suspends the obligation of the non-breaching party until the breach is cured (R2d '237).helps cts avoid disproportionate forfeiture from a minor imperfection (2) R2d '237 . (3) Factors courts look at to see if a breach is material (R2d '241) (a) the injured party will be significantly deprived of the benefit which he reasonably expected (b) the injured party cannot be adequately compensated for the part of the benefit of which he will be deprived (c) the party failing to perform will not suffer forfeiture (d) the party failing to perform is unlikely to cure his failure (e) the party failing to perform did not act in good faith (4) To determine the time after which a party¶s uncured material breach becomes a total breach. the failure to perform on time is a total breach 3. Failure to perform by the time stated in a K is generally not a total breach if performance is rendered within a reasonable time. If the K has interest payments. Minor or immaterial deviations from the K provisions do not amount to a failure of a condition to the other party¶s duty to perform (3) Use R2d '241 to see if material breach. the party can make other arrangements and sue for damages for uncovered amounts and costs including future damages (d) The non-breaching party must show that he was both willing and able to perform (e) A partial or minor breach does not end obligations. it does not communicate that time is of the essence since they are compensated for late performance b.each party¶s duty of performance is conditioned on there being no uncured material failure of performance by the other party.

his performance is due at an earlier time than the other party Page 14 .as long as quality of performance is met.g. the ct can allocate the price to each of the part performances (R2d '240) (8) Constructive conditions (R2d '234) . K to build multiple lots).(a) It is almost impossible to satisfy all technical requirements of complex transactions without glitches (b) Usually quality is the real issue .only applies if not stated in K (a) Where performance by the parties can be exchanged simultaneously.order of performance . SP overrides the express terms of the K (7) If a K is divisible and can be separated into part performances where each part is an ³agreed equivalent´ (e. there is no reason to find breach (c) SP helps avoid forfeiture when the other party performed objectively well in good faith (d) Parties can make compliance with express conditions as cental to the K to show that it is more than a quality issue (e) However.. they are due simultaneously (b) Where performance one party requires a longer period of time.

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